Today we will show a way you can follow another very important asset class as a co-indicator for the turns in the S&P 500. We have looked before at the co-movement of Treasury bonds, currency and U.S. indexes, especially the benchmark S&P 500.
The iShares iBoxx $ High Yield Corp Bond (HYG) is an exchange traded fund that tracks the performance of the iBoxx $ Liquid High Yield Index. One of the very useful things about the explosion of ETFs is that it provide a convenient way to follow indexes that might not otherwise be available, depending on your software platform.
In the first of three charts, I have shown a 10-day window, 15-minute interval, which captures the recent highs in the S&P 500. This is shown on a basis of percentage change in price returns. The S&P 500 is shown in green, the iBoxx ETF in yellow.
As we can see the ETF tracks quite closely to the return path of the S&P 500 when we are looking at the intraday chart. What is interesting about this is that high-yield corporate bonds generally are not issued by the companies within the S&P 500. With the recent downturn in financial conditions, many more stocks are in fact in the high-yield group as far as their debt is concerned than before. However, that isn't why the relationship works.
As with other indicators I have discussed, the relationship between the S&P 500 and the iBoxx ETF does not only reflect a fundamental relationship. One of the important attributes of high-yield bonds is that they are far more sensitive than investment grade bonds to risk variance and appetite.
When the markets turned back in March, the ETF turned at the same time as the S&P 500 did. When traders and investors are more confident of risk taking in high-yield corporate debt, it is generally a positive indication for equity prices, as is the inverse.
I have included a second chart here, showing the iBoxx ETF and the S&P 500 since March 1st of this year.
As you can see on the far left of the chart, before the turn, the two were very tightly correlated, indicative of liquidation effects which saw selling of assets of all kinds en-masse. After March 9, the two series rise together, and then start to diverge, with the S&P 500 relatively out-performing by May.
You can think of the iBoxx ETF almost as a support line for the S&P 500. As you can see by the red bars on both at the far right of the chart, they are co-moving to the downside today.
A third chart shows a full year view from the acceleration of the crisis last June, where the two return paths are nearly identical up until December of last year.
Then as you can see, the iBoxx ETF path popped well away from the S&P 500. That was a very good indication that liquidation forces that has been at work were no longer drivers and that risk appetite had returned.
As you can also see, it took some time for equities to play catch up to that newly found risk appetite. That was likely because of the fact that investors were more focused on what they saw as very attractive yields and prices for debt over that of common equity.
(Chart data provided by Thomson Reuters)
See all articles in the option trading area
